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Estate Planning Includes More Than a Will

June 29, 2023
Andrew Sigerson
The term ‘estate planning’ conjures specific ideas about leaving assets to heirs, fighting over Mom’s jewelry and lengthy entanglements with the probate court.

A good estate plan does more than avoid family squabbles and extended delays as the estate winds its way through probate court. A comprehensive estate plan works during your lifetime to protect you, your property and your heirs, say a recent article, “With Holistic Estate Planning, Everything’s Under Control” from Kiplinger.

Holistic estate planning addresses planning for your estate across multiple areas to ensure that nothing is missed, and there are no negative consequences. For instance, if you take a course of action without considering the tax implications, you or your heirs may have a larger tax bill than anticipated. If a financial planner doesn’t correctly set up Required Minimum Distributions (RMDs) from your IRA, you will be assessed a costly penalty.

Your estate plan will benefit from input from several other advisors: a financial advisor, a tax professional and an insurance agent. If you have significant health issues, you may also have a healthcare expert who should be involved.

The foundation of your estate plan is the legal plan. Your estate planning attorney will address the critical documents needed to protect your legal rights and enforce your wishes. They can also educate you concerning how to protect assets in the face of issues like lawsuits, debt, divorce, or the cost of long-term care.

Your estate planning attorney can also help you address concerns about beneficiaries, especially if your child or children are likely to lose most or all of their inheritance if they inherit a lump sum. If you have a disabled family member who receives government benefits, your estate planning attorney will help you plan with a Special Needs Trust to maintain your loved one’s eligibility for benefits.

An example of a holistic estate plan includes a health care power of attorney, living will, durable power of attorney, last will and testament and possibly trusts. Powers of attorney allow a designated agent to handle your business and financial affairs and make decisions if you are incapacitated. A living will documents your wishes regarding end-of-life care and life support. A last will establishes your wishes for the distribution of assets and appoints an executor to carry out your directions. Lastly, trusts are legal entities created to own and distribute the assets that a trustee manages.

Your tax advisor should work with your estate planning attorney, as there have been many changes in tax laws in recent years that have dramatically impacted estate planning. The SECURE Act of 2019 and SECURE 2.0 Act changed how beneficiaries inherit assets, especially IRAs. Depending upon your situation, it may make sense to convert your IRA to a Roth IRA and pay the taxes upfront, so your heirs don’t get a tax bill.

The IRS has quietly eliminated the step-up in basis on inherited property passing outside of probate. Before March 2023, beneficiaries who inherited property through an irrevocable trust would take ownership of the property at fair market value, not at the cost basis of what the trust grantor originally paid, eliminating capital gains taxes.

With the passing of Rev. Rul. 2023-2, the IRS stated that such property is now inherited at current fair market value, making beneficiaries responsible for the capital gains taxes. What’s the alternative? Allowing the property to pass through the probate process makes it subject to creditors’ claims, legal fees, court costs and other maintenance during the time it takes to finalize probate.

Estate planning preparation addresses legal documents, tax planning, financial advice, risk management and long-term care planning. If it sounds like it takes a small village to manage your life, it’s true. However, the alternative of not being ready for life’s eventualities is far more costly for you and your loved ones.

Reference: Kiplinger (May 24, 2023) “With Holistic Estate Planning, Everything’s Under Control”

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